After 2 weeks of rally in the markets where Mid & Small Cap stocks saw good recovery in prices, where do we stand now in mid March. Mid-caps have made 9% gains & Small caps have made about 13% gains since last 3 weeks.
Before the markets turned, the indications of the turn came from the 30 day NH-NL index reaching below -1000 for the second time on 15thFeb. Stock above 50 EMA index hits 15.47%, when this indicator reaches below 25, that is time for the market to turn from bear to bull market.
After both the above recordings 18thFeb was at the bottom and markets take off from there. Now where are we and what can we expect?
The rally has been fairly very good, not only Mid & Small Caps, even the Nifty and Sensex have reached for new high’s. Banking index saw an even big price rally. Currently the Above 50 EMA index is at 74.53. When it moves above 75, it is time to turn down. NH-NL have began to show bearish signs, 30 day NH-NL, has made double attempt to cross 1400 mark, which it is finding difficult. 60day and 52 week NH-NL are far lower than their peak achieved on 5thmarch.
A check on the other market indices. BSE has 19 indices of which 89% is bullish. NSE has 24 indices of which 88% are bullish. Even here we see top formation.
All these signals are showing early signs of weakness, while it is not yet confirmed for a turn down. Chart signals that have come for the week have more of buys than sells. Buy signals coming at the end of a rally can fail, while that is how the markets work.
When the market turns from down to upside, sell signals coming at that time will fail and all the buy signals will give profit exits even beyond target levels. As the trend progresses, buy signals will fail and sell signals will take leadership.
Can we avoid taking the second level signals and only have the winning trades?
No it is not possible, if we have to play the market game, we have be in it with right position size. Size will ensure that we are there in the game for a longer period and benefit from opportunities available from time to time.
One positioning that we can do is, to observe how are the outcomes of signals? If they are showing strength on the positive side of the trade, you know that the trend is strong and can have one more round of signals in the same direction. On the other hand if there are losing trades showing up and it is increasing as days pass. It means the prevailing trend is getting weak and you need to prepare the trades that are going to come in the opposite direction.
Following this message that comes from our own records will help us position better for a situation that is going to be favourable to us.